Leafly Holdings Inc (LFLY) 2023 Q1 法說會逐字稿

Good morning. Thank you for attending today's Leafly First Quarter 2023 Earnings Call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. (Operator Instructions) I would now like to pass the conference over to your host, Keenan Zopf with the Blueshirt Group. You may proceed.

Good afternoon, and welcome to Leafly's First Quarter 2023 Earnings Call. Joining me on the call today are CEO, Yoko Miyashita; and CFO, Suresh Krishnaswamy. Today's prepared remarks have been recorded after which Yoko and Suresh will host a live Q&A. A copy of our press release along with an accompanying earnings presentation can be found on our website at investor.life.com. Today's call will contain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include statements regarding the services offered by Leafly, the markets in which Leafly operate, business strategies, performance metrics, industry environment, potential growth opportunities, and Leafly's projected future results and financial outlook and can be identified by words such as expect, anticipate, intend, plan, believe, seek or will. These statements reflect our views as of today only, should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements, by their nature, address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations, and we caution you to not place undue reliance on such statements.

For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today's press release, our annual report Form 10-K filed with the SEC on March 29, 2023, and our other periodic filings with the SEC. During the call, we will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of the GAAP and non-GAAP results is included in our earnings press release, which has been filed with the SEC and is also available on our website at investor.leafly.com.

With that, let me turn the call over to Suresh for the operational and financial details.

Thank you, Keenan, and welcome, everyone. In the first quarter, we delivered results within our expectations. The macro-environment for cannabis continues to be challenging. While the consumer remains interested in cannabis, as evidenced by increased engagement on our platform, they're seeking value. As a result, our retailer and brand customers' margins are being squeezed, and they're tightening their advertising budgets. Within this context, we continue to focus on our 3 priorities: one, building a stronger marketplace; two, supporting the areas of the business that we believe will provide the greatest return from a near-term revenue perspective; and three, continuing to improve operating efficiency and preserving cash.

We ended Q1 with $15 million in cash. Q1 is far and away our highest cash burn quarter due to front-year loaded expenses. For 2023, these include annual insurance payments, including D&O, annual incentive payments and other Q1 public company costs that totaled approximately $6 million. It's important to note that our cash burn for the remaining 3 quarters of 2023 is expected to be significantly below the cash burn level in Q1, with savings from the March restructure contributing about $2.3 million per quarter. We paid approximately $750,000 in Q2 for the restructure cost. Taken all together, we now expect our 2023 cash burn rate to be modestly higher than the $10 million that we previously disclosed due to pressure on top-line growth, which I'll discuss in a moment.

Amidst the difficult operating environment, we remain committed to prudently managing our capital with the intent of not needing to raise new capital on our path to profitability. Now to the income statement. Revenue in the first quarter was $11.2 million, down 1% year-over-year. Our revenue from retail was $9.5 million, up 3% year-over-year. As we mentioned last quarter, we continue to see softness in revenue from brands, which declined 21% year-over-year and totaled $1.8 million. On a sequential basis, brand revenue declined 33% compared to Q4, reflecting a further pullback of brand spending on advertising, which we started to see in the second half of last year.

April is typically our strongest month for brands as they advertise heavily in advance of 420. That did not play out this year. We are preparing for brands revenue on a quarterly basis in 2023 to be at similar revenue levels in Q1. Ad budgets remain tight, and we're not seeing that spend return so far. Yoko will discuss changes to our commercial structure, which we believe present opportunities moving into the second half to improve brand revenue. Looking more closely at our retail results.

Ending retail accounts in Q1 grew 5% year-over-year and declined 2% sequentially to 57.2%. The bulk of this decline was attributed to one MSO who pulled their listings of weekly. Their exit from our platform was a one-off division and does not reflect what we're seeing across the business. Excluding the loss of this one MSO, which amounted to 165 accounts, our retail accounts would have grown 8% year-over-year and 1% sequentially. We are evaluating the health of our accounts across all markets and expect additional churn this year as the industry seeks a level of stability.

We've seen softness in certain markets for retailers as margins are squeezed and dispensaries and some operators are making decisions to exit unprofitable markets or stake. As discounted stores exit our platform, we've seen stabilization in our ARPA. Our retail ARPA in the first quarter was $553, a decline of 4% year-over-year and flat quarter-over-quarter. Q1 marked the third quarter in a row of stable ARPA, which gives us optimism that we're forming a base upon which we can improve. Going forward, we are focused on price increases and increasing share of wallet with our customers to drive improvement in ARPA in the second half of 2023.

Moving to our operating expenses. Our OpEx in Q1 totaled $14.9 million, down 15% year-over-year and down 9% sequentially. The reduction in headcount and cost-cutting efforts across the business allowed us to achieve this improvement in our OpEx. As a reminder, we took a one-time charge of approximately $750,000 in Q1 for the restructure discussed on our last call. Adjusted EBITDA for Q1 was a loss of $3.3 million compared to a loss of $5.4 million in Q1 of '22. We expect to report improvement in adjusted EBITDA each quarter through the rest of 2023.

Taking into account these factors, our guidance for Q2 is as follows: we expect revenue to be around $10.5 million in adjusted EBITDA to continue to improve and be around negative $2.1 million. As a result of the headcount reductions in October and March and added cost containment efforts, we're seeing improved operating efficiency in the business. We are focused on our path to profitability and are executing against our plans to achieve this by the end of 2024 as previously disclosed. Our sales restructure is now in place, and our content team and product and engineering groups are enhancing our platform for our customers and consumers. The team at Leafly is hard at work laying a foundation for success when markets improve. I'll now turn the call over to Yoko for more detail.

Thank you, Suresh, and good afternoon, everyone. As our customers' budgets tighten, we continue to operate with flexibility and prioritized efforts around managing cash burn. To do this, we continue to align our business to the challenges of current macro conditions and drive better optimization within our sales organization. The cannabis industry is dictated by what's happening in local markets, and we continue to take a prudent approach to the levers in our control. In March, we undertook additional rightsizing of our team and started to align our go-to-market strategy to the current environment. We are focused on growing sales from existing clients and increasing our share of wallet.

Our value proposition to retailers continues to strengthen, and a soft macro environment is more important than ever for retailers to attract and retain shoppers. Retailers rely on Leafly for high-value consumer relationships and a technology platform that facilitates an omnichannel experience. We are using this high-value proposition as a lever to optimize retail subscription and advertising pricing in certain markets, many of which have experienced continuous session and order growth on Leafly without a corresponding increase in price.

We've rolled increases out in select markets and receptivity has been positive. This is a key part of our plan to increase ARPA over time. It's early days in the rollout, and we remain conservative in our expectations for the impact of these increases in 2023. We're midstream in our transition to a new go-to-market model, ensuring the allocation of resources to our highest value clients while maintaining our local approach and proven track record of bringing new retailers onto the platform. This approach has us on the ground in market-leading customers face-to-face, allowing us to build deeper relationships with the goal of increasing customer spend across Leafly full suite of products and services tailored to individual market dynamics and customer needs.

In addition, our sales leadership has focused on more rigor and scalable operational processes. During the month of April, our team has been focused on account data cleaning, client introductions, training, and initial meetings. We are already uncovering opportunities to solve customer needs with different combinations of Leafly products. This shift includes training for all sales staff to cross-sell brand and retail products, which allows us to flexibly match our platform products to drive brand promotion at the top of the funnel and mid-to-lower-funnel consumer engagement. It's early days in these efforts with expectations of a more efficient sales organization able to fully reap the benefits of the reorg in the latter half of the year.

On the consumer front, we continue to focus on building the best consumer shopping experience in cannabis. This includes educating consumers through our new content strategy, helping them source the best product with real insights from our experts, and delivering value to consumers, particularly in this inflationary environment that's tough on their wallets. Our deal features are a critical part of this strategy with new deal types available and greater deal discovery in both our mobile and web interfaces. The number of retailers that have enabled deals functionality continues to grow, and we have seen growth in orders with the deal as consumers remain value oriented.

We've also made it easier for consumers to shop based on effects with shopping carousels launch more prominently on our strain pages, the world's cannabis encyclopedia in one of Leafly's highest traffic sections of the platform. Delivery is also the key component in the consumer shopping experience. In April, we expanded our partnership with Uber Eats in Canada. We initially launched in October of 2022 with just 3 stores as a pilot program in Ontario.

Today, over 100 retailers in Ontario participate in the program, making trusted and safe legal cannabis available to millions more consumers in the province. We expanded the Leeds partnership during the week of 420 to British Columbia, ensuring that many more consumers and retailers can leverage the powerful platform of Uber East and Leafly to gain access to legal cannabis. These omnichannel opportunities are how we help retailers grow and are vital to helping welcome new consumers to legal cannabis.

We also launched new ad creation tools, incorporating guidelines and tips to help aid the creation of powerful and engaging ad units. For many retailers that are small enterprises, the expertise that Leafly offer through existing workflows provides trusted guidance that helps them unlock value on the Leafly platform. There continues to be wide variation in momentum from local market to local markets, and we're encouraged by what we are seeing in states like Missouri and Vermont and are looking ahead to the opportunity in Maryland as they go rec legal as soon as this summer.

On the legalization front, we are in full support of the bipartisan safe banking bill that was recently reintroduced in both chambers of Congress. We also continue to see movement at the state level as Minnesota is poised to become the 25th state to legalize recreational cannabis. In conclusion, our performance in Q1 reflects what all of us are experiencing cannabis. A mix of right opportunities, combined with different pain points, depending on the operator and the market. Both varying pain points will continue for some time. But moving forward, we remain confident that the changes I spoke about and our intentional focus will allow us to drive growth and innovation for consumers, retailers, and brands that we serve. We look forward to updating you on our progress in the coming quarters.

We will now open up the call for questions. Operator?

(Operator Instructions) The first question is from the line of Jason Helfstein with Oppenheimer.

This is Chad, on for Jason. So it sounds like brand was a little worse versus 4Q. And with a lot of the other major advertisers reporting stabilizing ad trends, is there anything else you can share around what you're seeing and maybe why brand is performing worse for you?

Let's turn up brands and what's happening specifically for Leafly and in the Canada sector. For us, there's the macro pressure on advertising, certainly some bright spots as we're seeing outside of cannabis. I think it's a little slower to come to cannabis. But there are a couple of specific things that are impacting Leafly specifically on the brand. Over the last 6 to 12 months, you've seen regulations that have impacted national advertising campaigns for novel cannabinoids. And that is a meaningful portion of our brand revenue. And we've seen that impact. We've got a full range of a suite of products available to that customer set. So we've seen that impact our brands revenue piece.

As you look at the platform as well for those operators who both maintain retail and brand operations in the vertically integrated space, the most important thing is for us to keep them on our platform as a retail subscriber whereas the top-of-funnel brand products tend to be a nice to have when there's a squeeze on the margins. And so I think you can expect to see that squeeze on the brand's revenue continue until cannabis overall starts to come back out of that trend. It will be slower to recover than our bottom-of-funnel products. And let me be clear, we've got bottom of funnel brand products as well in our menu merchandising. But we're going to expect sort of top-of-funnel brand spend to come back less in the recovery that we're expecting. Anything you want to add to that, Suresh?

No. I think that's good. Just to reiterate, I mean, given all the that we are forecasting and preparing for flat brand revenues for the balance of this year.

(Operator Instructions) The next question is from the line of Vivien Azer with TD Cowen.

This is Seamus Cassidy on for Vivien Azer. So while the overall market remains challenged? We've seen some recent stabilization in wholesale flower prices, particularly in West Coast markets. I'm curious if you guys have seen any flow-through from your retail partners in those regions, maybe being more willing to spend on the Leafly platform as things have stabilized a bit?

I really appreciate the question, Seamus. And certainly, on the trends that you've identified in some of your coverage and tracking wholesale and market recovery. We are starting to see some of that, I'm not quite ready to share numbers as it relates to California and Oregon. But I think we're aligned in that we've seen the worst of that in terms of churn that I think is really a macro impact. And starting again to see those operators that have survived that decline coming back out they understand. And what we're really excited about is the sales restructure that really allows us to go deeper with every one of those clients as they're coming back out of that cyclical decline and engage around how we can bring the full power of the platform to bear and take share of wallet as well as drive growth for them as this market emerges.

And then maybe just one on your guidance for 2Q. Some of your brands are flat. Could you provide maybe just a little bit more color around sort of your assumptions for new account growth in 2Q and ARPAs as you sort of have these like competing dynamics between penetrating new markets and then also churning through lower ARPA retailers as you did this quarter?

Yes, sure. So as we mentioned and as we said in our call, in Q2, we are on the sales side as a follow-up to the restructuring, working on some account cleanup. We're looking at our accounts across markets. We're certainly looking for some of that churn that we've seen to continue in Q2. And this is a combination of delinquency out of business, structurally challenged markets where we've seen lower ARPA accounts come off the platform. But the flip side of that is, as the lower ARPA accounts do come off the platform, we expect ARPA to improve.

And on top of that, we're focused on deepening the relationships with our higher-value customers and raising prices in certain markets as well. So the combination of that should lead to upside in ARPA from sort of what we're seeing, and we mentioned that we've seen that stabilize in the last couple of quarters. So as far as retail accounts go, the same churn and these impacts are going to lead to a decline in Q2 in ending retail accounts. However, once we're past that, we're looking for the second half of the year for our teams in place to really focus on continuing to build from a much stronger base. And we're going to see, at least we're projecting for the retail account growth to improve on a sequential basis.

There are no further questions in queue. (Operator Instructions) There are no questions remaining in queue. With that, we will conclude today's Leafly First Quarter 2023 Earnings Call. Thank you for your participation. You may now disconnect your lines.